Advise needed! Heloc vs conventional loan

[Erin Lytwyn]

Hello all,

We are looking to purchase an investment property.

We are wondering what the best method of financing is so I thought I would crowdsource some info:

Conventional: We wont need the loan until October as it is a new build still being finished, but we are being quoted around 7% for an investment property with 20% down.
Heloc: We have enough equity in our primary to take out 75% of what we would need for our investment property at 4%ish, then we could either 1) put down rest of cash to buy outright 2) look for financing for the rest.

Curious as we are new to the game which approach seasoned vets would advise?

[Dean V.]

Hey Erin!

I'll start with the typical "it depends" - what are your goals with the investment property (cash-flow in the short term, long-term appreciation, how quickly are you looking to buy additional investment properties, etc.)?

My personal attitude is generally to put as little of my own money into investment properties as I can so I can have more cash available to scale more quickly and/or put into other investment opportunities (and of course for things like emergency funds, reserves, etc. depending on your situation and if you already have these things or other ways of reducing risk).
As long as it can pay for itself (including reserves), as little down as possible is my ideal strategy since I don't really care as much about cashflow in the short term.

Obviously putting more money down will lower your monthly payments and increase your cashflow on the property, especially when having the opportunity to borrow the rest at a lower rate with the HELOC (also, 7% seems a little high, have you talked to multiple lenders?).

My two questions would be:
1) Does the investment property meet your goals/criteria (adequate cashflow, ROI, etc. whatever is important to you) with the 7% interest/20% down loan?
2) If so, maybe stick with the 7%/20% loan and look for other investment opportunities that you could put that HELOC to use on!
2.5)  If not, either consider using the HELOC to get it there as you were thinking, or maybe keep searching to see if there are better investment properties out there instead that better meet your goals using the conventional financing.

Not sure what your situation looks like, but have you looked into second home/"vacation home" loans?  Due to a recent change, your interest rate will likely be similar that of an investment property, but you should be able to put as little as 10% down.

Cheers,
Dean